Structured betting

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Would you accept a bet where someone promised you about a 15% effective interest rate on your stake, if the stock prices of Sampo and Fortum stay at least at their current level or rise during the next year? Minimum stake €5,000.

Does it sound too good to be true? Would you immediately think, what if one or both fall below? Do you lose your chips right away? No, you don’t lose them, instead the situation is checked every 3 months until it hits, and then the effective return for the entire period is paid, e.g., about 45% after 3 years.

If it so happened that the stock prices of Sampo and Fortum did not simultaneously exceed the current level for a full 6 years, then assuming neither has fallen by more than 35%, the interest would be halved, i.e., 6 x 7.5% = 45%. If, on the other hand, one of the stock prices had fallen by, for example, 60%, you would only get 40% of the initial stake after 6 years without interest.

Do people have experience with these structured investment instruments? Is there some trick that Juurikki doesn’t quite grasp?

Shakespeare already stated that there is something rotten in the state of Denmark. However, things haven’t been completely messed up there since the time of Christian the Cruel, i.e., for the last 500 years, so Danske Bank’s issuer risk is probably quite low.

Juurikki was thinking of playing with a couple of tens of thousands, unless someone convinces him before Monday morning that it’s not worth it. Thanks for the comments in advance.

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So if one doubles and the other drops 50%, you lose 50% of your investment? When can this be redeemed? Note that this looks at the stock price, and both companies pay high dividends, so a large part of the investor’s return comes from dividends rather than capital appreciation, which lowers the probability of capital appreciation.

So it seems to be a fairly typical structured product where the upside is limited (here 15%/a) and the downside is not (or limited to 100% :)). A good rule of thumb for these is that the bank doesn’t do them out of charity. This means that the bank has estimated the probabilities of different events and the product is priced accordingly. For this to have a positive expected value for you compared to a regular stock investment, you would need to be able to estimate the probabilities affecting the product’s price better than the bank. Similar to betting. Some people can do this in betting, but most bettors cannot.

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If you are interested in structured products, I recommend you first familiarize yourself with the topic carefully. As for literature, I would mention Pääomaturvattu sijoittaminen (Capital-Protected Investing) by Sami Järvinen & Antti Parviainen.

And let me also say that the current interest rate level is poison for these products.

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Juurikki doesn’t dare to admit having visited the much-maligned Alexandria to listen to investment advice? :grinning:
https://www.alexandria.fi/fortumsampo2
This is likely the product in question?

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These kinds of products are essentially designed against you. As Kabu mentioned, Sampo and Fortum pay out a significant portion of their earnings as dividends, so the share prices themselves can very well stagnate.

Furthermore, the “autocall” mechanism seems to eat away at the best opportunities for large returns. If both share prices perform well, the product is “called” early, and you receive a limited return. The best returns are achieved if 1) the share prices do not initially develop positively and 2) subsequently develop positively, exceeding the original prices — this is likely more improbable than it might initially seem.

If you are genuinely considering investing in this, I recommend first doing Excel simulations to see what investing in such a product would have yielded, for example, starting in 2015, 2016, or 2017.

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I have to knock myself out and stop dreaming in this area too. The age-old (bear) wisdom applies: if something looks too good to be true, it probably isn’t.

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I invested a small amount in that investment product earlier this week. It was only part one of it.

I also have an earlier one still open, which is tied to the development of Scandinavian banks. Despite the interest rate, a 16% annual return is likely to be realized.

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I spent some time pondering this. When evaluating the benefit of the structure, a reasonable comparison is a direct Sampo+Fortum investment, which is likely where the issuer intends to put the funds raised.

If both are above the initial price, and the return including dividends for a direct investment exceeds approx. 15% p.a., the issuer wins. Conversely, if it’s above the initial price but the total stock position’s return including dividends is below approx. 15% p.a., the issuer loses the difference. (Over time, the p.a. return threshold decreases, meaning 1-year return 18% but for six years only 13%)

If at least one is between the initial price and -35% and the combined stock return including dividends is greater than approx. 7.5% p.a., the issuer wins. If the return including dividends is less than 7.5% p.a., they lose, which practically means if the Sampo+Fortum basket’s price development is negative.

If at least one option falls by more than 35%, the issuer always profits if they made a direct investment in Sampo and Fortum themselves.

From this, one can conclude that the issuer primarily loses if both suffer a small loss or make a small profit. Additionally, there’s a 2% subscription fee.

Conversely, the investor receives returns in all cases, except if one of the stock prices falls by more than 35%. Furthermore, if the price increase is significant and the return including dividends exceeds the structured cap, the investor gives up some of the returns to the bank but remains absolutely in the black. The same happens if one of them is somewhere between the current level and -35% and the basket’s return including dividends exceeds half the cap, i.e., 7.5% p.a.

I would say that as an instrument, it’s not remarkable. But the issuer has a rather bullish view. Clearly, that over -35% from the current level in 6 years is primarily a tail risk control.

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Thanks to @Helel and @evolution and others who have combed through this matter. :+1:

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Investing in these is not a free lunch, but they are not a pure scam either. Just like in the stock market, the right vision is rewarded. When you browse the selection, most of them are pretty bad. However, every now and then, there are some that align with your own view and offer a good risk/reward ratio. Currently, about 5% of my investment portfolio is in structured products (strukses).

For example, in this case, I see an excellent risk/reward ratio. (What I noted was tied to the same companies, but the initial interest rate was 20%/year).

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Yeah, I wouldn’t be happy with the carpenter who launched this.

Way too generous for the investor. The bank could lose money here.

I wonder if it’s a loss leader (sisäänheittotuote). In my opinion, the expected value is slightly negative for the bank, even though the investor won’t get a huge overperformance after fees, and the structure is mostly a hedge against mediocrity.

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Unsecured Investment Linked to the Share Price Development of Fortum Oyj and Sampo Oyj

An investment in Notes involves various risks. Prospective purchasers of Notes should ensure that they understand the nature of the relevant Notes and the extent of their exposure to risks and that they consider the suitability of the relevant Notes as an investment in the light of their own circumstances and financial condition.

CERTAIN ISSUES OF NOTES INVOLVE A HIGH DEGREE OF RISK AND PROSPECTIVE PURCHASERS OF NOTES SHOULD BE PREPARED TO SUSTAIN A LOSS OF ALL OR PART OF THEIR INVESTMENT.

—-> you can lose all or part of your invested capital!

It is the responsibility of prospective purchasers of Notes to ensure that they have sufficient knowledge, experience and professional advice to make their own legal, financial, tax, accounting and other business evaluation of the merits and risks of investing in the relevant Notes and are not relying on the advice of the Issuer or any Dealer in that regard. For a discussion of these risks see “Risk Factors” below.

Arranger for the Programme
DANSKE BANK
Dealer
DA

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The reader of this thread probably understands the value development of the instrument in different cases of underlying asset development as well as I do. That’s a blanket statement that must be mentioned in those cases. I’ve explained it in simple terms.

A stock is also an unprotected capital investment, where the invested capital can be lost entirely or in part.

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